Today’s Blog – Thursday 25th May 2017

Editorial

The industry press has contained a fair bit of comment on how the recent regulatory relaxation that allows the direct sale of US LNG to China might shake up the global LNG industry.

Research group Rystad Energy has joined the fray – concluding that new Chinese sales will allow North American production to increase to well over 100 Bcf per day (in comparison, domestic East Coast consumption in Australia is around 700 Bcf per year). Additional volumes were thought to largely come from the prolific Marcellus/Utica Basins – at current Henry Hub prices of just over US$3/mcf.

However, an implicitly contrary view comes from the likes of Tudor Pickering Holt (TPH) – who consider that the current US gas market is currently structurally under-supplied – that is, that production is less than consumption, with a swollen inventory that is only gradually being eaten up allowing prices to stay at current levels.  The logic of this argument must then go onto say – current prices are not driving new investment – and therefore the weakness in the Rystad view is that a few extra 10s of Bcf of production per day will not magically appear at those current prices.

So – China plans to consume a lot more gas (its economy uses far less gas than the similarly sized US one) – the US could sell more gas to it – but presumably prices would have to rise in order to bring on more US production – in which case other suppliers nearer to the PRC could be able to out-compete.

There are lots of moving parts – and other views – including the one we quoted last week – that the Permian will produce a lot of “free” associated gas that will look for a home.

Commodity prices

Oil prices fell overnight as the current OPEC meeting proceeded.  Brent closed down 0.7% at US$53.83 and WTI rallied a bit later in the day to close down only 0.2% at US$51.36.

The weekly EIA report had a strong crude draw of 4.4 mmbbls (or 4.8 including SPR sales); weaker than expected gasoline draw of 0.8 mmbbls and distillate down by 0.5 mmbbls.  All up this appeared to be quite bull-ish to us – but the bears took the day with a view that gasoline disappointed.

Henry Hub closed down nearly 1% at US$3.20.

Disruption

The ongoing global news flow of rapidly declining bulk EV solar production costs continues.  An Arizonan utility has just contracted to purchase electricity at ~US$40/Mwh whilst across the planet an Indian deal (the reporting is somewhat confusing on units and currencies) has been done at what seems to be an even lower one.  These are still higher than the record sub US$30/Mwh recorded in the UAE last year – but are still very low.

Fossil fuels for new build power stations generally cannot compete with this on a simple per Mwh metric – only by recognising their dispatchability can they do so (which is hard to price – and becoming worth less as storage technologies themselves deliver lower costs).

Company news – Shell

Our readers are all expert players of bullsh** bingo – and would see many chances to bang the table with the following quote from Shell’s VP of Upstream Unconventionals – reported in a recent TPH daily note:

“Rather than physically separate the organization or acquire an independent and bolt it on as others have done, Shell has elected to fully integrate its unconventional unit in the global structure.  Shell’s perceived slow start was a function of the objective recognition that building unconventional capability was the critical first step to success…. the team is not trying to distance from its integrated parent, but rather take advantage of the strengths global scope and scale provide – balance sheet, technical reach and bench strength, etc.”

Observers in Queensland as to how Shell actually operate in the CBM space might note a small gap between corporate theory and on-ground ultra-high cost reality….

Quote of the day

Following the demise of suave 007 actor, James Bond, a quote from The Man with the Golden Gun that provided good practice material for Steve Coogan and Rob Brydon in The Trip:

Bond – When I kill, its on the specific orders of my government. And those I kill are themselves killers.

Scaramanga –  Now, Come, come, Mr. Bond. You disappoint me. You get as much fulfillment out of killing as I do, so why don’t you admit it?

Bond I admit killing you would be a pleasure.

 

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